Telefonica SA (TEF) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to December 2011 results conference call. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session. (Operator instructions.) As a reminder, today's conference call is being recorded.

I would now like to turn the call over to Ms. Maria Garcia-Legaz, head of Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call to discuss January-December 2011 results. I am Maria Garcia-Legaz, Head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been prepared under international financial reporting standards. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors.

We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefonica Investor Relations team in Madrid by dialing the following telephone number, 34-91-482-8700.

Now let me turn the call over to our Chairman and CEO, Mr. Cesar Alierta, who will be leading this conference call.

Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome to Telefonica 2011 results conference call. It is my pleasure to chair this call.

Today with me are the members of the Executive Committee. So, during the question and answer session, they will have the opportunity to answer the questions you may have.

Let me start with the highlights of the year 2011. It has been a year of significant progress for the Group, not only globally but also vertically.

First, we have reinforced our franchise in Latin America, a region which already accounts for over 45% of our results. We have strengthened our leadership in Brazil, the key market in the region and our main growth engine.

Second, we have surpassed the 300 million accesses mark, further increasing our scale. Third, we have led the mobile broadband adoption across our footprint, a key cornerstone of our growth strategy. Fourth, we have reinforced the value chain, expanding vertically and increasing our scope through Telefonica Digital. Fifth, we have continued building competitive advantages with significant investments in mobile broadband, ultra broadband, and spectrum. Sixth, we have strengthened our liquidity position.

On top of that, we have posted a solid set of results. We have delivered top line growth, retained industry leading profitability, and met operating guidance despite worse than expected trading conditions. And finally, we have delivered leading cash returns for our shareholders.

As you can see on the next slide, all these milestones have been achieved while reaching best ever free cash flow generation levels. We are clearly outperforming our peers.

We are the most geographically diversified integrated telco player in the telco industry. And despite market concerns, we have the lowest exposure to European markets among our peers. Our unique diversification and active financial management have been key to post this strong performance despite higher levels of investments to bolster future growth.

Moving to slide number seven, I am particularly proud of the new strategic boost implemented from last summer to accelerate the Company transformational journey and to increase our growth potential. In the last six months, we have sped up the optimization of our asset base, reaching several agreements with third parties and selling noncore assets.

We have also taken decisive actions on the commercial side to regain momentum across our markets. Moreover, we have set a new remuneration target which allows us to maintain a very competitive remuneration while increasing our financial flexibility.

Finally, and key for the future of Telefonica, we have implemented a new organization that will allow us to speed our execution in the digital world and to fully exploit all the benefits of our scale through the recently created global units, Telefonica Digital and Telefonica Global Resources.

Slide number eight shows that the commercial repositioning just mentioned is already showing very positive results. We have recorded a very strong acceleration in net adds in the second half of the year, especially in mobile, driven by record smartphone sales and the solid increase in the contract segment, which already accounts for one third of our mobile base.

The Q4 figures were particularly strong, leveraging the Christmas campaign. We have invested to bring enhanced propositions to our customers, efforts that have allowed us to grow our customer base by 7% year-on-year, setting the basis for future revenue expansion.

On the mobile data business, a key strategic area for Telefonica, we are positioning -- posting very strong results. We are leading data adoption and monetization in our markets, allowing a very fast expansion of mobile broadband penetration across our footprint, with levels around 30% in Europe and a huge potential ahead of us in Latin America.

Data revenues continue to deliver an outstanding growth, and already account for 31% of mobile service revenues and over 40% in the case of Telefonica Europe. Non-SMS data revenues were very strong, up close to 40% year-on-year, to account for 52% of total data revenues. Again, we are outperforming main competitors in this market.

Please turn to side number 10 to get more color on how we are monetizing the mobile broadband explosion. First, we are mainly focused on smartphones. In Europe, over 90% of handsets sales on the contract consumer segment in Q4 were smartphones. The penetration in the prepaid segment is still very low. And this is clearly an opportunity ahead of us, as every day there is a wider portfolio of handsets and cheap -- at cheaper prices.

Our pricing strategy, based on tiered pricing across our footprint along with integrated tariffs in Europe, is leading to positive signs of profitable data monetization. Let me stress that all our smartphones have the data rate attached and therefore are active users of the service, with an average uplift in ARPU of 1.5 times in the case of a regular contract customers.

The profitability of the smartphones versus a regular contract customer is 1.4 times higher. This figure varies across countries, depending on local subsidies, improving along the time as we leverage lower handset prices, lower commissions, and we control network costs with our limited tariff plans.

This strategy is working, with traffic growing -- growth decelerating and converging with the revenue growth, which is accelerating and growing very nicely. I would like to draw your attention to the case of Telefonica Germany, a good example of successful data monetization, with non-SMS data revenue growing at 47% and traffic at 32%.

Looking into 2012, we will honor our strengths to execute our growth strategy. Thanks to our healthy expansion in the last years to increase diversification, we are now in very good shape to succeed.

Trading conditions in Europe are difficult, but close to 50% of our sales already come from other geographies. And as I said before, we have the lowest exposure to European markets among our peers. Moreover, Latin America continues to grow very strongly, and the structural growth potential in the region remains intact.

We are in a very unique position to capture this growth opportunity. Despite regulatory noise, our net exposure to mobile termination rates and roaming in Europe is very limited.

We are an industry where scale is a must and Telefonica's global franchise cannot be replicated. Being number one or number two in most markets is key to deliver profitable growth, and we have already built these local competitive advantages in key markets.

Traditional revenues are under pressure, but we have rapidly increased the contribution of mobile data to our sales and we are taking the right actions to profitably monetize the mobile broadband boom. Telefonica Digital will be key in this area.

Turning to next slide, in a changing digital environment we have already the right platform to monetize this opportunity based on very solid foundations. First, we have 307 million billing relationships on a global IP multi-access network.

Second, our strength in enterprise and government market segments places us in a very good position to exploit changing value chains. Third, we have a timing advantage over competitors, with 18 months experience on Digital Services development through the verticals and the unique experience we have in United Kingdom, the most European advanced digital market.

And fourth, the huge cross-sell opportunity arising from managing existing customer relationships, from basic access to media portals like Terra, to social interaction as Tuenti, and even client-to-client customer services as Giff-Gaff.

This unique combination of assets and capabilities is already driving growth from new digital services while fostering the transformation of our core business. And we are already seen as the best partner for emerging digital players, given our unique combined position of Europe and Latin America.

In the current digital environment, a global, open, and scalable network becomes the major differentiator in the whole value chain, as it complements our digital assets with a unique combination of high speed connectivity with computing and storage capabilities that will help us to outperform in the digital world.

A complete set of assets, including physical elements and intangibles such as spectrum and unique telephony address space, are key to guarantee end-to-end control and quality of services. As an example, we are already providing differential content delivery services, especially fit for video, and also innovating on digital communication services for end users, offering a single and ubiquitous customer experiences on a variety of access technologies, including fiber to the home and LTE.

Let me now put some numbers in context. We have invested EUR31 billion in the last four years. Our full IP core network adds up to five million kilometers of terrestrial fiber, connecting more than 100,000 servers with capacity to transfer more than two terabits per second, equivalent to 250 video CDs per second.

Wireless accesses are supported by more than 100,000 base stations. And we are offering fiber to end customers in six of nine main markets, where 50% mobile base stations are already connected.

We have a very strong R&D franchise with more than 1,000 engineers developing digital services for Telefonica, including open interface to more than 10,000 external developers. In addition, technology innovation is reflected in the close to 100 patents registered annually, half of them being part of actual products and services.

In 2012, our first priority is to foster revenue growth, leveraging further commercial momentum with focus on fixed and mobile broadband, a key lever for access growth. The launch of Telefonica Digital will further push our revenues up.

We will execute a tight control of costs to extract efficiency gains to balance growth and profitability amid increased customer investment, to support top line expansion, and improve market share, capitalizing on the scale benefits through Telefonica Global Resources and taking advantage of integrated and restructuring plans to maximize in-country efficiency.

We will continue strengthening our networks with focused investments in broadband to improve networks capabilities, including a selective deployment of fiber and LTE where appropriate and depending on regulations. This strategy will be compatible with maintaining a very attractive and sustainable shareholder remuneration policy and lower debt levels.

In 2012, total shareholder remuneration will amount to EUR1.50 per share, including the payment of a cash dividend of EUR1.30 per share and a share buyback for the remaining amount. And we expect to reduce our leverage ratio below 2.35 times net debt to OIBDA.

Regarding the operating guidance, we expect revenue to grow about 1% in 2012 at current exchange rates. We will continue to deliver solid profitability with an OIBDA margin decline lower than in 2011. And CapEx to sales ratio will be similar to 2011 figures.

As you can see on slide number 15, free cash flow generation comfortably exceeds expected outflows linked with dividends and share buybacks. In 2011, free cash flow per share was EUR2.06. And our remuneration targets for coming years are around EUR1.5 per share, so there is very ample room.

And we have the leading dividend yield not only in the sector but among the top largest companies by market cap worldwide. I am very sure that this anomaly will reverse, and the correction will not come from the numerator but from the stock price.

Let me now hand the call over to Angel.

Thank you, Cesar. Please turn now to slide number 17 to start with a detailed review of 2011 results.

In the second half of both 2010 and 2011, we booked several very significant extraordinary items. So, to better understand the underlying performance of the Company, we are providing a P&L excluding those non-recurrent effects and non-cash impacts.

As such, revenue reached EUR62.8 billion in 2011, growing by almost 5% excluding regulation. Underlying OIBDA totaled EUR22.7 billion, down about 1% ex-MTRs despite increased commercial activity. Net income totaled almost EUR7.5 billion, resulting in an underlying earnings per share of EUR1.66 euros.

Slide number 18 reviews Telefonica's organic performance. On this basis, revenue growth excluding MTRs was 1.4%, while OIBDA margin posted a year-on-year decline of 2%.

CapEx, excluding spectrum, was below EUR9 billion. So, revenue, OIBDA margin, and CapEx performed in line with our full year targets, resulting in an organic operating cash flow figure of close to EUR14 billion.

As slide number 19 outlines, Latin America continues its progression as the key engine to revenue growth and more than offsets lower sales from our European businesses, accounting for almost half of total revenues, up 4% thanks to the higher contribution of Brazil. In terms of OIBDA, Brazil will soon account for about one fourth of consolidated figures, with Telefonica Latin America already representing 48% of Group's OIBDA.

Moving to slide number 20, in 2011 we posted a healthy 36.1% organic OIBDA margin, which remains as a benchmark among our peers. This profitability level reflects a strong cost control and benefits from our scale amid strong commercial activity, record smartphones sales, and increased network and IT expenses mainly related with the rollout of our mobile broadband networks and enhanced customer care.

In 2011, we have also invested heavily to support long-term growth. Total CapEx, excluding spectrum, was roughly EUR9 billion with growth across most businesses, being Latin America and Spain the main contributors to year-on-year organic growth.

CapEx to sales stood at 14%, slightly higher than in 2010 and in line with our peers. On top of that, we invested EUR1.3 billion to reinforce our network through spectrum acquisition in several geographies. As a result of these and past efforts, we can affirm that we are not under-investing in the business.

Turning to slide 22, let me highlight that in 2011 our strong free cash flow generation could allow us to reduce net debt by EUR1.6 billion, pre-discretionary and non-cash items. Financial investments, comprising the purchase of Telefonica, Vivo, and China Unicom shares, led to a net debt increase of 1.3% by year-end.

Since year closing, we have materialized significant debt reduction actions. Agreement has been reached for Colombian restructuring, and some minority stakes have been divested. As a result, net debt would be down by EUR1.5 billion euros versus December 2011.

Net financial debt to OIBDA stood at 2.46 times, or at 2.63 times when including commitments and excluding assets sales. Once post closing events are considered, net financial debt to OIBDA stands at around 2.4 times.

Please notice that with the share purchases already included in our debt balance at year-end, the cash outflow for the next interim dividend payment should be significantly lower, since up to EUR0.30 of the next dividend distribution could be in kind.

Furthermore, our active financial management has been key to minimize debt cost and maximize cash preservation. First, effective interest cost of our debt stood at 4.91%, 9 basis points lower than in 2010 on a comparable basis in spite of current debt market conditions.

Second, we have demonstrated our cash upstream capabilities with record cash repatriation from Latin America, exceeding the EUR3.3 billion in 2011.

Third, our working capital management has led to further cash available, over EUR1.35 billion cash generation, while an appropriate tax policy has resulted in a 5% cash tax rate reduction versus 2010. In both cases, we are beating the guidance.

I would now like to highlight our strong liquidity position. At year-end, we held EUR5.1 billion cash position, excluding the cash in Venezuela. On top of this, in 2011 we renewed and increased by EUR1 billion our undrawn committed credit lines, so that at year end we had over EUR10.1 billion euros available. 76% of those credit lines are long term. And year-to-date, we have additionally extended approximately EUR0.6 billion euros undrawn lines to 2014 and 2015.

Amid demanding credit markets, we raised around EUR11.5 billion during 2011, maintaining a balanced approach to the credit markets and diversifying our funding sources, first by getting continued support from banks, second by our successful access to the bond markets, and third by benefiting from other alternative funding sources such as multilateral facilities, export credit agencies, or local market financings.

In addition, in the first two months of 2012 we have also been very active and have made strong refinancing progress. Year-to-date financing activity amounts to EUR2 billion euros with a EUR10 billion order book on our recent bond issuance.

The syndicated refinancing is in very advanced stage and will be closed very shortly. This, together with the preferred shares which are extendable to perpetuity at our discretion, allow us to say that 2012 maturities are substantially refinanced.

Looking into 2012, we have as financial priorities to increase balance sheet flexibility and to maximize shareholder value. We will continue working to progressively reduce the leverage ratio and to protect our rating. We will continue to be opportunistic and to proactively refinance our debt, looking beyond 2012.

We will maintain M&A discipline with focus on an active portfolio management, as shown by the progress made so far in restructuring the Colombian operation and divesting non-core stakes.

We will further execute strict working capital and tax management measures to maximize cash flow generation, and we expect again to beat cash tax guidance. All of these will strengthen our position to deliver premium returns and value to our shareholders.

Let me now focus on the performance of our businesses by region, starting with Latin America. 2011 has been a year of very solid growth in the region. And the strong performance recorded on the commercial side, especially in the second half of the year, has led to a healthy expansion of 10% in our customer base.

Particularly strong was the momentum in mobile, with net adds growing by 66% year-on-year in the fourth quarter to reach 7.5 million. Our targeted actions on high value customers have led Telefonica to reach the largest contract base in the region and to lead the mobile broadband adoption in Latin America.

It is important to highlight that increased customer spend is flowing into revenues, leading to an acceleration in revenue growth in the last quarter to 6.3%, excluding regulation, driven by a 9% year-on-year growth in mobile service revenue. This sets the scene for a promising 2012.

As you can see on slide number 27, higher commercial costs dragged OIBDA growth by close to 6% in the year. The good news is that we achieved superior commercial performance with lower mobile subscriber acquisition costs, which are down 10% year-on-year. So, the increase in costs is a direct consequence of higher volumes, not of higher subsidies.

There are other factors affecting OIBDA year-on-year comparisons, like the impact of regulation in Mexico and the lower contribution from regional projects that more than offset tower sales in 2011.

CapEx to sales reached 18% of our Latin American revenues, up year-on-year on the back of higher investments, showing our commitment with the region and our total confidence in its growth potential.

Let me now comment on the very strong performance recorded in Brazil. 2011 has been a year of multiple progresses, completing the corporate restructuring and executing the integration process with early benefits coming above expectations, which led us to upgrade the initial synergies' targets.

On top of that, in the second half of the year we have enhanced commercial activity, being active in all fronts. New tariff plans were announced, new services were launched, and we entered into new areas, leveraging the best spectrum portfolio in the market and very attractive prepaid propositions.

Moreover, we have widened our quality gap versus competitors, increasing the difference versus our peers in 3 coverage and further expanding selectively fiber in Sao Paulo to increase speeds and quality in our fixed broadband business.

All these actions have led to very strong results, as shown in slide number 29. In 2011, we have further expanded our leadership, gaining value share in the mobile market while we continue to lead the fixed broadband market in Sao Paulo. Strong commercial momentum translated into revenue, with year-on-year growth accelerating in the fourth quarter on the back of mobile service revenue acceleration and sound fixed broadband and TV revenues performance.

And our margins are the best in the market, despite the strong drive in commercial activity, leveraging on synergies realization which are more visible below the operating lines in the P&L.

No doubt we are in the best position to continue leading the growth in the largest market in Latin America. These excellent results are being recognized by the market with Telefonica do Brasil shares appreciating in the market since the results announcement and accumulating a 30% relative outperformance versus the index in the last 12 months.

Turning now to slide number 30, I just want to stress the strong commercial activity across our properties in the south region, setting the basis for further revenue growth combined with sound margins. These operations generated in 2011 close to EUR2 billion in operating cash flow.

There are different market realities across the region, but one thing is common. Telefonica is leading the transformation in the business. Our mobile broadband penetration is unmatched, and we are a step ahead. In these countries, our integrated approach becomes a true competitive advantage.

On the next slide I want to highlight the acceleration in the north region revenue growth. Regarding Mexico, where results were heavily impacted by regulatory headwinds, we are focused on quality growth with a very marked improvement in outgoing revenue trends in the second half of the year. Looking into 2012, we expect growth to accelerate in the region.

In Brazil, we will leverage on the foundations set in 2011, and integration synergies will be key to free resources and support our aggressive growth strategy.

Commercially we will benefit from the attributes of having the best brand in the market nationwide and for all our services, as Vivo will be the single brand as of the first half of the year. We aim to consolidate our mobile leadership across all segments with special focus in mobile broadband.

In fixed broadband, we will leverage network upgrades in Sao Paulo, and we have already started to move outside our traditional area of influence with very attractive propositions in a potential market of more than 50 million households, representing 65% of the Brazilian GDP.

In the rest of the region, we will prioritize the mass-market adoption of fixed and mobile broadband on the back of bundles, tiered pricing, cheaper devices, and enhanced network capabilities. Commercial strategies will be adapted to particular market conditions with a clear focus on leveraging our integrated position in markets like Argentina, Chile, Peru, and Colombia.

Let me now review our operations in Europe, starting with 2011 performance. As Cesar mentioned before, in the summer we decided to revisit our commercial strategies in key markets, launching new propositions that, together with the solid uptake of smartphones, led to an outstanding improvement in commercial momentum in the fourth quarter of the year both in mobile and fixed broadband.

Our lead in the mobile broadband market resulted in a strong performance in mobile data, with smartphone penetration up 8% year-on-year to 27% of our base and non-SMS data revenue delivering a solid 30% organic increase, clearly outperforming main competitors across key markets.

Moving to the specifics of Spain on page 34, I'd like to highlight the significant commercial improvement across businesses. The new tariffs launched allow us to better compete in the marketplace.

Fixed broadband net adds turned positive in the fourth quarter with a marked evolution through the quarter. There is a clear preference for the higher value products, with two thirds of the customers opting for the new tariffs of EUR24.9, a price point that is above previous promotions and allows to sustain the improving trend in connectivity ARPU.

On the mobile side, net adds reached record levels since the end of 2010, with better results across segments and the best ever net adds in mobile broadband, over 400,000 in the fourth quarter.

Mobile data ARPU showed a very strong evolution along the year with sustained double digit growth in the last quarter. On the other hand, voice ARPU worsened in the fourth quarter, impacted by a weaker private consumption, cut in MTRs, and price repositioning, which will drag revenues in the short term but will help increase gross adds and reduce churn in the coming quarters.

In 2011, we also took other decisive actions to make structural progress in Spain that is already bearing fruit. On the costs side, the increased flexibility on personnel expenses led to a rise in salaries below the CPI, while the fast execution of the new redundancy program will lead to savings of over EUR200 million in 2012. Close to 2,400 employees have already left the Company and another 2,000 will join the plan this year.

We also increased CapEx intensity not only in absolute terms but also in relative terms, with a 12% CapEx to sales ratio as we continue to expand capacity and coverage in mobile broadband and to selectively rollout fiber. On top of that, we invested over EUR800 million to ensure the best spectrum in the market.

Finally, Q4 financials reflect the impact of price changes and lower usage in a weaker economy, which impacted mobile service revenue. On the other hand, fixed revenues proved more resilient, posting sequential improvement. Top line pressure flew directly into OIBDA in the quarter, as benefits from the workforce reduction were negligible and increased commercial activity limited savings.

Our 2012 priorities for the Spanish business are outlined on slide 36. We have a clear roadmap to turn around the performance along the year, starting with improved commercial results on the back of more competitive propositions and new measures to increase customer satisfaction. These actions should allow us to improve gross adds, reduce churn, and stabilize market share performance. As a result, we expect customer growth to help top line evolution, although tariff repositioning will impact revenues in the first half.

On the cost side, savings from the redundancy program will flow since the beginning of the year, while lower churn should positively impact commercial costs. On top of that, we will further benefit from OpEx efficiencies derived from outsourcing, handset portfolio optimization, and the support of Telefonica Global Resources.

Moving to slide number 37, Telefonica UK finished the year with strong traction in the contract segment, recording the best quarterly net adds in the fourth quarter driven by the new commercial focus introduced in August. Our priority was to increase loyalty within the highest and most profitable smartphone base in the UK market.

To achieve this goal, we encouraged the adoption of new integrated tariffs and offered the newest high-end smartphones first to existing customers coming out of contract, which led to a 35% year-on-year increase in upgrades in Q4. The renewed commercial momentum amid sustained top line pressure impacted the OIBDA margin in the quarter, which stood at 24.2% and 26.5% for the full year.

Despite strong competition, we continue to lead smartphones adoption in the UK, expanding penetration in our base by close to 9% in 2011. More than 80% of contract customers in the consumer segment were under tiered schemes at the end of December, with most of them opting for one of the top two tier data bundles.

As you can see from the service revenue waterfall, mobile data, including SMS, is adding the most to 2011 performance, 4%, to represent 47% of the total. But, this was not enough to offset the drag from regulation and a weak macro environment, which is accelerating lower tariff options and fit to bundle consumption from customers.

Over the top arbitrage risks continue to be well addressed with 75% of service revenues in the contract segment included in a bundle. This is 3% more than in 2010.

Turning to slide 39, we have completed a very successful year in the German market, maintaining a strong commercial momentum and improving monetization of mobile data thanks to the continued development of the O2 Blue tariffs and the traction in business and low value segments through exclusive partners.

Contract net adds ramped up in Q4 while we maintained our leadership in smartphone adoption at 90% of total shipments. Mobile service revenue growth, excluding the impact from regulation, recorded a strong growth at over 7% year-on-year in 2011, mainly driven by mobile data with non-SMS revenues rising close to 50% in the year.

A solid sales performance coupled with full benefits from efficiency plans led to a 39% organic growth in operating cash flow, while OIBDA margin increased to exceed 24% in 2011. In summary, very strong improvement in Germany.

Looking into 2012, we aim to strengthen our position both in the UK and Germany, two key markets for Telefonica. In the UK, we aim to recover momentum and stabilize market share to drive better revenue dynamics, capturing and retaining high value customers while keeping our leading position in the mobile data market. This will be achieved through significant commercial spend coupled with increased focus on customer experience, including innovation around new digital services.

In Germany, we aim to continue outperforming in a very profitable market. Network quality, customer satisfaction, and converged approach in the definition of products and services will be key to achieve our goals in a more stable regulatory environment. LTE will be a main driver for future growth, in 2012 centered around smartphones and the urban network deployment, adding the benefits from network collaboration with DT in the backhaul.

Finally, I just wanted to highlight the continued improved performance recorded in the Czech Republic, both commercially and on the financial side, which, together with the new shareholder remuneration structure, led the stock price to rise over 7% on the day of the earnings release.

To finalize, let me now spend a few minutes to explain how we will maximize the benefits arising from the launch of the new global units in 2012. Telefonica Digital will continue to develop its strategy of growing revenues above connectivity from digital assets in high potential marketplaces, exploiting profitable partnerships with main actors in the industry while protecting Telefonica's core communication business in tight coordination with the regions.

We are making significant progresses, as evidenced by the recent agreements signed to launch financial services or the brand new long term contract with OnStar on the machine-to-machine space. We will provide a specific update on Telefonica Digital's strategy and goals ahead of Q2 results.

In parallel, the launch of Telefonica Global Resources is already allowing us to accelerate the generation of additional synergies to fully exploit economies of scale. We are already working on several flagship projects with high value impact. In fact, main projects are already on the way in key areas such as procurement, particularly on the devices side, and Network and IT, which together should lead to benefits over EUR1 billion in 2012.

On top of that, we will further advance in network collaboration schemes with third parties and on the sale of non-core infrastructure to get additional efficiency gains.

Let me now hand it back to Cesar for the closing remarks.

Thank you, Angel. It has been a long presentation, but let me sum it up.

We have the right fundamentals for sustained profitable growth. We have recorded a promising commercial momentum heading to 2012. We will prioritize investments to drive forward growth. We are determined to improve financial flexibility. And we are fully committed to offering a very attractive return to our shareholders, and we can do it.

Thank you very much, and now we will answer all your questions.

(Operator instructions.) We would kindly ask you to ask a maximum of two questions per participant. And if possible, we do not recommend the use of a cell or hands free phone. There will be a short silence while questions are being registered.

Tim Boddy from Goldman Sachs.

Yes, thanks. I wanted to ask about your guidance for 2012. Do you expect to sell more towers in 2012, and is that likely to help your EBITDA performance during the year?

And secondly, on SMS substitution risk, if I've got the numbers right, there was an acceleration in the decline in SMS both in the UK and in Spain in the quarter. Can you talk a bit about trends in SMS and IP substitution risks in your European business? Thanks very much.

This is Julio Linares. Thank you for your question. When we set up the guidance for this year, as always we tried to maximize our operational assets. And in order to do so, we always analyze what assets are strategic, or if they are not strategic, what assets we should control or we do not need to control.

In such a way, that -- it is able to analyze those assets that we will leave, that are not strategic for us, and then we focus on the resources in the best possible way. This has been the way that we set up our OIBDA guidance every year, and we are keeping this practice in the year 2012 as well.

Taking your question as the evolution in Europe, there are different realities across different units for sure, depending on the tariff structure. But, let me highlight that, for example, in the case of Germany the number of SMS has been significantly increased all along the year, even though we have -- precisely probably because we have a bundle strategy of bundling voice and SMS in the German market. So, in the German market, it's not been an issue so far.

In the UK, it is true that the number of messages or SMS per customer, it's showing a slight decline. But, it is also true that we have bundle and a flat SMS tariff. And therefore, in terms of revenue, we are not exposed to that evolution because we thought that was going to be the case and we prepared our tariffs for that.

And in the case of Spain, you know that we recently changed our tariff structure in Spain because in Spain we are exposed to that -- to the SMS evolution. And therefore we bundled, at the end of last year, voice and SMS and data, having a flat rate for SMS included in some of our tariffs.

So, Spain was the case where we were more effective, but we have been trying to immunize ourselves to this evolution through these bundles and through these flat tariffs. So, for the time being, we are -- we think that we are protected with the current tariff scheme that we have.

Thanks very much.

Next question, please?

Georgios Ierodiaconou from Citi.

Hello. I have two questions, please. First one is a follow up on the previous question, whether you could give us some idea of the magnitude of tower sales that you expect in 2012. And if I would put it differently, if we look at the bottom end of your guidance for a 2% decline in EBITDA margin, could that be the case even if you have a fairly significant program for tower sales this year?

And my second question is on the data you gave us on page 38 about around three quarters of service revenues coming from inter credit tariffs in the UK. Is it possible to give us a similar number for Spain, a comparable number for Spain? And perhaps, if you could, give us an idea of how this has been evolving during 2011. Thank you.

Due to the market conditions, we prefer to communicate the impact of these kind of sales once they are executed, as we have been doing on a quarterly basis along 2011.

Taking your second question, we don't have here the exact information replicating the page 38 for the UK for Spain. But, I can give you some flavor of what has been the -- what have been the main reasons behind the evolution in Spain churn that has eroded part of our value of customer segments.

In the ARPU, the worse mix between and lower and high end customers for Spain all along the year, the decline in SMS revenue, still we announced this new tariff, and finally we have been taking away some promotions and some actions that were not meeting our customer satisfaction criteria. And therefore, that has affected revenues in the short-term.

But, I would ask you to get back to our IR department to get more clarity on the specific evolution, because we don't have the specific data here.

Next question, please?

Ivon Leal from BBVA.

Yes, hello. Good afternoon. Thanks for taking the question. Just on Spain, it would be very useful, if you could share a bit with us, if you perceive any change on consumer trends in Spain in the first two months of the year, given that we have austerity measures now hitting the street. And eventually, and depending on how the year is going, if there isn't a potential for other OpEx cuts in Spain also for 2012.

In terms of -- consumer trends remain weak in Spain in the first two months. So, a similar trend to the last quarter of the previous years in terms of overall market sentiment from the consumer standpoint. So, for the time being, no good signs on that side.

And in terms of OpEx reductions, we keep looking for efficiencies. Remember that this year we will fully benefit from the employee reduction program that we launched last year. So, it will flow within this year through our P&L.

And on top of that, you should expect from us that we will be more -- I would say we'll be adapting our subsidy strategy during this year in Spain in order to be much more focused on our existing customer base, and therefore having the bulk of our efforts in the commercial side retaining our high end value customers and therefore trying to avoid significantly churn.

So, those are -- the flavor that I can share with you right now.

Actually, if I recall --.

Next question, please?

Will Milner from Arete.

All right. Thank you. I just wonder, on the leverage, what's driven you to commit to the reduction in leverage by the end of this year now. I think it implies around EUR5 billion of debt reduction based on the guidance and the dividend policy. (Technical difficulties.)

I think we have a problem with the line. Operator, can you double check it, please?

Hello, this is Angel Vila. With respect to leverage, we have -- excuse me.

Hi, operator. Are we connected?

Yes. Will Milner, can you press zero-one on your telephone keypad?

This is Angel Vila. With respect to leverage, we have closed 2011 above the level that we guided to the market. This has been the result of a deterioration in the macro and financial environments across Europe. So, our debt triggers have been impacted by adverse foreign exchange movements, the euro depreciation versus other reporting currencies. Obviously, it has also affected our operations, as it has been expressed before by some of my colleagues.

One other matter affecting the increase in the leverage when you give commitments is that we have had a higher take up in our employee redundancy program in Spain to 36% instead of 33%. And this clearly will impact in better savings for next year.

Also, having seen the excellent progress of our free cash flow generation, we decided to dedicate further resources to the share buyback in order to anticipate cash savings for 2012 shareholder remuneration. So, this has led us to finalize our leverage above what we had guided for year end.

Looking into 2012, we expect leverage to be reduced based on several factors. First, as I expressed in the presentation, we have some actions that have taken place post the closing of the exercise where we are already reducing net debt. We have the Columbian debt restructuring. We have been selling stakes, minority stakes in Hispasat, in Portugal Telecom, in some other assets.

Also, we are going to continue progressing on measures like working capital management that this year has had a very positive contribution to our free cash flow. And we expect to also be the case in 2012, albeit could be a smaller positive effect.

If you take into account all of these effects, we expect -- well, and also as you have seen on slide 15, the cash out which is related to shareholder remuneration is going to be significantly reduced as compared to the one that we had in the previous year. So, all in all, we expect to have organic deleverage by year end in addition to what may come from a further streamlining of our portfolio of assets.

Next question, please?

Justin Funnell from Credit Suisse.

Thank you. Yes, a couple of things. Just wondering first if you'd be a bit more explicit about your commercial costs in Spain. Vodaphone, when they cut price initially in May 2011, made it pretty clear that they were hoping that a lower ARPU price point would ultimately lead to lower SAC. We haven't seen that yet in the market. But, do you think that strategy of yours on lowering commercial costs is really part of that process and that we should see the Spanish mobile market become ultimately more profitable across the markets later this year?

Secondly, I notice your relatively positive comments about mobile data in the UK and the question of tiering with a lot of your customers on higher tiers. We're seeing again Vodaphone questioning whether tiering is working and are customers really spinning up to higher plans. I was wondering if you could share any of your experience. Perhaps you're having a more positive experience.

Trying to be more precise on the comments that I made about commercial costs for this year in Spain, what we have done at the end of -- all along year 2011, starting in July and keeping going in November in terms of repositioning all of our targets, we are trying to do two things.

First of all, aligning our commercial effort, because we were out of the market and we were losing relevance in terms of the market and we wanted to get back some commercial momentum, which we did, again starting by the tariff that was launched in July and keeping it in September and back again in November.

And we are betting that, thanks to that, we will be able to reduce churn because, at the end of the day, we are dead either -- in Spain, we have the largest customer base and we have probably the most valuable customers. And we wanted to reduce churn as a way to try to preserve the high end customers and therefore to stop the erosion in terms of service revenues.

That's -- it's too soon to say because it's just two months after the last launch of the tariffs, but it is going into that direction. So, the first signs are positive, so we'll keep going into this path.

And on top of that, you are right. We think that the next step should be more rational behavior in terms of the subsidies policies in Spain, because we -- at the end of the day, we want to invest this amount of money or to use a significant part of this amount of money to preserve and to give the best value to the existing customers. And therefore, once again trying to reduce churn.

So, if I had to summarize what are the main guidelines below our strategy of the commercial repositioning, it's to try to be much more competitive to gain commercial momentum, which we have done, and to be able to reduce churn, because us having the largest customer base, we are the most ideal candidate to churn on.

We have been doing several actions in terms of bundling, in terms of bundling data with SMS, in terms of bundling data, SMS, and voice, cross bundling with broadband, with fixed -- with wireline broadband. And this is taking traction.

So, we think we are on the right track. We think that this is the right direction. We think it is the role of the leader of the market to show the way of the rationale behind the market, and that's what we are trying to do. And as you might imagine, we are monitoring very closely.

And in terms of your question about the UK market and the comments, we are not going to comment on the comments of Vodaphone, as you might imagine. But, we did a status refresh in August last year which helped us to gain more commercial traction in the UK. In the month of November with the launching of the iPhone 4S, we bet on the existing customer base precisely to try to avoid the churn, because keep in mind that we have the most valuable smartphone customer base in the UK market. And as you might imagine, we are closely monitoring every single movement on the UK market.

But, for the time being, with the traction that we got from the August refresh status and with the current strategy, we think that we are on the right direction. We are gaining some commercial traction. Were the conditions in the UK market to change structurally, then we will reconsider.

Thank you.

Next question, please?

Luis Prota from Morgan Stanley.

Yes, thank you. I have two questions on Spain and both on tariffs. The first one is on the new mobile packages that were launched in the fourth quarter and whether these packages are behind the accelerated decline in ARPU in the fourth quarter, whether you've seen any material trade down effect that could potentially turn into ARPU accretion in 2012 as up selling succeeds. That's the first question.

The second question is again on tariffs but now is on DSL and whether you could give us some kind of indication on what percentage of existing DSL customers were also mobile contract customers and therefore could apply for the EUR25 tariff, and also what percentage of them have actually migrated to this tariff already. Thank you.

Thanks, Luis. Taking your question on the effect of the bundles, I mean, again too soon to say that with the information, because it was just launched in November. But, as you might imagine, we are monitoring that on a daily or weekly basis.

With the information that we have right now, the effect that we were looking for with this repositioning has been in the right direction, which means that we do not see, on the customers being on the new portfolio, having a worse performance than the customers on the preexisting portfolio, which means that all the things being equal, I mean, all of our customers being affected by the overall market sentiment, the customer that has chosen to go into the new portfolio first are showing a better performance than the others.

And on top of that, churn of those customers are going into the right direction. Churn of those customers are lower than the one before, even though churn is a very early stage because it's just two months. So, it's too soon to conclude that this is going to be the behavior along the year. But, so far it's going into the right direction.

So, we think that the market repositioning is working well because it has allowed us to be much more competitive and to get commercial traction. It shows lower ARPU decline than the customers coming from the preexisting portfolio of products and helps us to be much more relevant from a commercial standpoint.

And taking your question on the DSL, I don't have here the figure of how many customers of DSL are subject to bundle with. But, what I can say is of this new tariff of the EUR19.9 and the EUR24.9, the current mix is two thirds EUR24.9 of new adds, one third of EUR19.9 new adds. So, again going into the right direction. The value-added services looks to be attractive in terms of the tariff books and the additional bundles. So, again, too soon to say, but things look like going into the right direction.

Next question, please?

Robin Bienenstock from Sanford Bernstein.

Yes, good afternoon. Thanks very much. Two questions, if I may. The first is that we seem to be seeing huge value being sucked out of the industry by handset manufacturers, and in particular Apple. And that looks like what I'm seeing in the UK Q4 numbers. So, I'm wondering if there's anything that you or your competition can do, like investing significantly more in a differentiated network or something else to stop that process.

And the second question is about your net debt to EBITDA targets, which is -- so, am I right in assuming that you're going to include asset sales of towers in the EBITDA number when you think about those net debt to EBITDA targets? And isn't that a little odd, given that the tower sales will presumably have a negative impact on your EBITDA going forward?

I think the best we can do in the industry is to provide a good quality of service to our customers, to provide better bandwidth to our customers, and really to keep going on our offer in order to include more applications on the entire services, together with connectivity.

And as I said before, we would prefer not to provide early information about the sales that we could do through the year, taking into account the market conditions. And we will provide that information on a quarterly basis as we executed the projects.

Next question, please?

Jonathan Dann from Barclays.

Hi there. Two questions. The first one, the tower sales contributed, I believe, 100 basis points positively to the 200 basis points decline in margin. Was that more or less than you thought, say six months ago, when you guys were thinking the second half could get better?

And my second question, you highlighted EUR1.5 billion of debt reduction from Columbia. Could you remind us what the sort of equity side of that is and if there's any book value changes you need to make?

To tell you about the tower sales, if you look at our number to 2011, the original project in 2011 was much lower than we presented and much lower than the sales of tower assets. I said during the presentation we have 100,000 towers, okay? And you can believe that many of that 100,000 towers are not strategic at all. They are not part of our core business. They are not strategic at all, okay?

Why we have led original project in 2011? Because the potential we have now in the value chain because of the new digital position that we have and we are putting the effort in the end value of the digital chain. Where we are going to grow a lot is where we are going to make the effort in digital space.

So, the number of towers is irrelevant for the growth potential. So, don't so much worry about the tower sales, because it's irrelevant, okay?

Okay. With respect to the Columbia debt reduction, the EUR1.5 billion figure is not only Columbia. The Columbian figure would be about EUR1.3 billion. And this is the result of an agreement reached with the Columbian government. That has been approved by the Parliament of such country and has been published in a Presidential decree.

Basically what is public already is that the Columbian nation will be taking on their books 48% of the liabilities that corresponded to our fixed line business as part of capitalization of that company. And our share of capitalization of the company will be taken by merging the company with our mobile operation in such country, deriving synergies from that fixed and mobile integration.

This process is very, very advanced. We have reached agreement and it's pending some formal execution steps that will take place in the next couple of weeks.

Next question, please?

Fabian Lares from JB Capital Markets.

Hi. Good afternoon. Thank you for taking my question. Related to the repositioning and commercial offer, in particular what you've done both in the UK and in Spain to move away from the value positioning and more towards the commercial positioning to maintain customers and basically go back into the market as you are now positioned, can we take it as a given, then, that this is going to be the trend moving forward and thus the positioning for value for money is no longer relevant as was stated in the Investor Day in April? That'll be my first question.

And second, related to the net debt to EBITDA target of 2.61, or 2.63 now, does that in any way, shape, or form compromise your possibility of having -- considering you have a negative outlook and ratings with two agencies, that this could mean that you could be downgraded? Thank you.

Well, taking your question on the new tariff launching both in the UK and Spain and if it is volume or value, the worst case scenario is that -- being under positioned. And I would say not well positioned, commercially speaking, we had the threat -- we were suffering the fact of high end valuable customers leaving us.

And therefore, we wanted to be back on the market precisely to be able to both retain the valuable customers and be back relevant on the commercial side. And that's what we have done both in the UK and in Spain. In Germany, our commercial launching of our commercial tariffs are in very good shape.

So, I would say that it is not giving away volume or value. It's that we were, I would say, not relevant commercially speaking and we were losing a significant amount of very valuable customers to our competitors. And that's precisely what we want to avoid.

And that also explains the fact again that you will see all along this year, mainly here in Spain, that we will be much more rational on the subsidies because the last -- the preference is going to go to preserve the most valuable customers that you have. And therefore, most of our commercial efforts are going to be devoted toward valuable customers in every single market. Namely here in Spain as well in the UK in terms of the smartphone base, we have the most valuable customer base. And that's precisely what we want to preserve.

And with respect to the leverage ratio, our target is 2.35 net debt -- net financial debt to OIBDA. We stand today at 2.46. And after the post closing debt reduction actions, we would be around 2.4 times.

This objective of 2.35 net financial debt to OIBDA is equivalent to the previous net debt plus commitments divided by adjusted OIBDA of 2.5 times, which we will continue to report. So, you should not be concerned about this change, because it's equivalent, what we are stating, in one or the other ratio.

By the way, this ratio is not only known by the rating agencies, actually in some of the recent reports, for instance Moody's, they were using these ratios when they published. So, the financial position is known. It's public. And regardless of whether you're using one ratio or the other, what we are committed is to work in the direction of reducing leverage, which, again as I said in the first two months of the year, we have made substantial progress in that direction already.

Next question, please?

Torsten Achtmann from JPMorgan.

Hello. Two questions, please. First on Spain, is there any chance you can quantify the impact you have seen in revenues in the fourth quarter from rebalancing the SMS tariffs into the voice package, how much negatively influenced revenues?

And secondly, on Latin America, it seems in a few markets competition is increasing, Chile, Brazil, some of the other markets. Is that a trend you expect to continue in 2012? And given that you started increasing commercial activity to gain customers last quarter, do you continue to spend on customer acquisitions and therefore driving gross customer acquisitions? Thank you.

Taking your question about the SMS evolution and the impact that the new tariffs may have on the revenues coming from the reduction of SMS in Spain, it is very hard for us to say because we have bundled that. And therefore, for us now it's much more in terms of our location. We are approaching that through our data. We are seeing data expansion in terms of consumption. So, it is very tough for us to see that here.

But, as we have come in Spain to the same strategy as in the UK and Germany, bundling in order to be much more inelastic or less exposed or more hedged toward the reduction in SMS. So, we don't have information here to tell you that, because it is now bundled and therefore we are not seeing that impacting revenues because we have seen now that bundling to date barrier that we have.

Let me share with you some -- the only information that can help you to conclude. Let me remind you that our SMS is just 6.5% of total mobile service revenue in Spain before the bundling. So, the exposure is very limited and is now bundled.

Hi, Torsten. This is Santiago. On your question on Latin America, it is certainly the case that competition is picking up, but it's picking up for the right reasons.

In one case or in some cases like, say, Chile, it's because the market is approaching maturity. New entrants are trying to carve a niche in the market, and therefore the temperature rises. There where temperature is rising, we have, however, the strongest starting point. And it's difficult to assail an already established position.

In other markets like, say, Brazil, what's happening is that growth is accelerating. So, yes, commercial expenditures are up, but they are up for the right reason. The right reason is that net adds are rising, the quality of these customers is rising, and, again, the newcomers are trying to establish a point and not quite succeeding all the time.

So, the short answer would be yes, we still think that the commercial activity is going to be performing very well. Net adds are going to increase. And the already established operators like ourselves are likely to derive some benefits, although not in the short but more in the medium term, let's say four to six quarters ahead.

Thank you.

Next question, please?

Keval Khiroya from Deutsche Bank.

Yes. Hi, everyone. So, two questions on LatAm. Firstly, can you provide some color on how much support we should get from the Vivo synergies in '12 or '11? And can you also give us some color on what the integration costs will be like in '12 as well?

And secondly, following up on the question on commercial activity in LatAm, from that should we interpret the EBITDA delivery in LatAm will continue to be weak in 2012?

Santiago again. On the Vivo synergies, we have little to add to what we have already said. We think we are approaching nicely and gently the upper end of the synergy band that we set for ourselves on both the non-operating and operating synergies. Remember that the top line number was about 4.4.

The strictly operational synergies are proceeding nicely. And I think we should be able to provide some detailed numbers about them sometime in the first half of this year, because the restructuring is not fully complete and we are wary that some numbers might compromise our position in some of those areas.

And in terms of commercial activity, I think I have to reiterate what I just said regarding other markets. I don't feel particularly challenged in any special markets, so Brazil is certainly not an exception. And I think that what you are likely to see is an acceleration of the efforts of the substandard players in the market to gain share and probably not much success stories coming from them.

Next question, please?

Stanley Martinez from Legal & General.

Hello everyone. Good afternoon. Thank you for taking my questions. First, just briefly on Venezuela, can you refresh on your foreign exchange assumption, specifically whether you see any reason for changing from the official EUR5.56 exchange rate to something close to the implied gray markets, which I think is closer to VEB8 to VEB9 per euro.

And then, secondly on Mexico, if I strip out the EUR217 million gain on the tower sales, it looks as though Movistar had a 17.5% service revenue margin despite losing sub-share. And since Mexico is the only country where you go to market with more of a pure mobile focus, my question is what changes specifically in the commercial mix between distribution, tariffs, brands, subsidy, network to rebuild back toward your performance levels of a few years ago, or do you really need a change in asset mix in addition to potential changes in regulation?

Hello, Stanley. First on Venezuela, we are accounting at the official exchange rate in the country. The situation may evolve, but at this stage we don't have a better estimate or an assumption that we may share on this topic. I would maybe just add that we have also been able, during 2011, to repatriate over $200 million from such operation, which continues to perform quite nicely.

Hi, Stanley. Santiago again. To your comment, Mexico is a complex place because competition is established in another manner relative to all other markets in the region. We are working on two main fronts. One is to make it surface -- make a healthier customer base surface. So, we're trying to be more demanding on what we require of our commercial distributors. So, this division is certainly one channel we are working on and making progress in. This is likely to provide a healthier customer base where churn is easier to manage.

Is the -- are we satisfied with the margins? We are certainly not, and we are working towards extending those margins in the right way, which is not by increasing activity but by increasing the stickiness of our own customers.

In the numbers of Q4, there are a number of things. Not all of them are easy to disentangle, but you might also look at some negative effects which are substantial relative to the size of the OIBDA generated in the quarter to the tune of EUR23 million. So, I don't want to play with the numbers, saying this is recurrent and not recurrent too much. But, certainly that may add to the apparently low-ish number that we have published.

Okay. Thank you.

Next question, please?

Jerry Dellis from Jefferies.

Yes. Thank you for taking my question. Two questions, please. Firstly, in the UK on slide 38, you show quite a large optimization impact depressing UK mobile revenues. Given how many customers are on integrated tariffs now, I wondered whether you could sort of explain in practical terms how customers are optimizing their usage in order to sort of spend less at this point.

And then, a second question on Brazilian fixed line. It does look as though, if we adjust the reported numbers for the TVA acquisition in Q2, revenue trends have deteriorated somewhat in the last couple of quarters, underpinned by what looks like worsening lines and rather weak pay TV ads. Just wondered whether you could help us sort of understand the outlook for the Brazilian fixed line business in 2012, please. Thank you.

Taking your first question on the UK market and trying to split up the mobile revenue deceleration reduction of basically 3.7% in the quarter, I would say 20% of this reduction, mainly the 0.8%, are coming from lower customer base growth both in prepaid and in postpaid. That's precisely -- we are trying to address being much more relevant in the market. So, part of the deceleration is because we have less customers because we have been less active in the market.

And 80% of the remainder is due to lower incoming and out of bundle traffic. We are suffering from the consequences of a soft economy, of course, and lower consumer sentiment. And on that side, consumers are being much more -- I would say they're optimizing much more of their bundles. So, it's roughly 20% coming from a lower base, both in prepaid and postpaid, and 80% coming out of bundles.

And that is why, in a quarter where we have seen a high number of reg rates and contract resigns, we need to be certain -- assured that we are focusing our retention efforts precisely to address that. So, that's the explanation, the split up of this 3.7% reduction.

Jerry, Santiago again. On Brazilian fixed line, I think I would summarize the situation as follows. You have a declining revenue trend from voice fixed services. This is unlikely to be stopped. And it is falling a bit faster than broadband adoption and increases in penetration are rising. So, the net effect is either a small negative or a small positive, depending on the quarter. And because we are by far the largest player, we are likely to continue suffering some erosion from traditional fixed lines.

What I think the good news are is, number one, the total size of the pie is increasing. If you have -- if you take a couple of quarters' view, you will see that because the market is expanding and underlying incomes are rising, the overall value of the market is actually rising. And eventually we think this is the trend that is going to prevail.

On TV ads and our acquisition of TVA last year, those are events that happened in specific times. But, we would not ascribe a lot of interest to them, because they depend a lot on tactical reasons of deployment here and there.

You'll know, because we'll publish that when we publish the Telefonica Brazil numbers, that we're trying to expand seriously on the fixed -- I'm sorry, on the fiber to the home activity, that we had a lot of homes passed and we are now shifting the trend and the attention towards homes connected. This is not an easy thing, but we think we're uniquely positioned, along with our cable deployment, to get the best value out of those large investments that are -- already have made but not quite developed yet.

Thank you.

Next question, please?

Luigi Minerva from HSBC.

Good afternoon. The first question is on Telecom Italia. Their dividend cut today may hurt the ability of Telco to be able to service their debt and also to maybe refinance the EUR3.4 billion which are due this year. Can you give us your view on that and whether that may lead to reconsider your position within Telco?

Secondly, on Brazil, the Brazilian press is speculating about the introduction of ULL by the end of this year. Can you give us an update on your views about the process with Anatel? Thank you.

Hello, Luigi. This is Angel. On Telecom Italia and Telco, we are happy shareholders in Telco. In fact, as you say, we need to do the refinancing this year of maturing debt. So, the first step that will be very likely adopted by the partners is to renew the shareholder agreement, and then we still start our conversations with creditors. Of the total debt of Telco, EUR2.1 billion is bank debt and that's the one that will need to be refinanced by midyear.

The reduction in the dividend of Telecom Italia clearly reduces the income for Telco, but still provides the ability to refinance that debt at what we think are going to be the new market conditions for it. We will start negotiations with financing entities very early on this refinancing, and obviously it will be -- quite probably that will be the result of it. Free cash flow, Telco becomes or continues to be free cash flow positive, even after this dividend cut.

Yes, Luigi. And in terms of the possibility of the Brazilians introducing ULL, while it's anybody's guess, the Brazilian authorities and the government entity -- regulatory entity agency Anatel are moving very fast in very different directions. I'm sure that not all of them can be brought to a conclusion this year.

And ULL is probably too late. If you ask my own personal opinion, it's probably too late in arrival because the Brazilian -- the Sao Paulo market is already well developed and well served. It is unlikely that opening up the ULL, which is a European invention of dubious consequences and benefits, will be successful there because most of the broadband is already developed on either cable or fiber grounds, and VDSL is also present.

So, to be plain and straight, I don't know what the outcome will be. We do not think as a Company that ULL such a great regulatory piece. But, if it comes, then we'll have to adopt. Let's also not forget that we are talking of the Sao Paulo market, but that we have just entered selectively the non Sao Paulo market, which is 60% of Brazilian GDP. And we can access that not by ULL but also by fixed wireless telephony, and this is a great, promising, fast growth area.

So, whether or not it comes, I think it's going to have very minimal consequences because, number one, most of the berths will have been taken by either cable or fiber or the existing VDSL, or we will be successful or we will possibly deploy outside of Sao Paulo, which is exactly what we have been doing since Q4 of last year.

Thank you very much.

Next question, please?

Giovanni Montalti from Cheuvreux.

Hi. Good afternoon. Thank you. Just a quick question. Should we still consider China Unicom stake as, let's say, a core asset, so not to be included among something you might dispose of? Thank you.

We are extremely happy with the participation in China Unicom. The potential of China Unicom is tremendous. The potential of the collaboration between Telefonica and China Unicom is tremendous. Once thing you should have in mind is that we work together very closely on many fronts, all the fronts on the value chain.

And together, we have nearly 700 million customers, which is a big thing. The collaboration between China Unicom and Telefonica is increasing over time, and we see a lot of potential and synergies that may exist together with China Unicom.

So, I think both of us -- Telefonica is very happy with the participation we have in China Unicom, and China Unicom is very happy with the participation they have in this. And the only thing we see ahead is a much stronger relationship between the two companies.

We have now time for our last question.

James Ratzer from New Street Research.

Yes. Good afternoon. Thank you. Two questions, please. The first one was just regarding your dividend policy from Telefonica Brazil. And it strikes me that that company is fairly under levered at the moment. The dividend you approved for year end was only about 70% of underlying free cash flow. I was wondering is there a reason why you're not gearing that company up further to repatriate more cash? I mean, are you potentially thinking about doing more M&A from that company? Is that the reason why you're keeping the balance sheet under levered?

And the second question I had was regarding O2 UK. I mean, there's obviously been quite a lot of optimizing going on within the customer base at the moment. The commercial cost you're undertaking, though, is that one-off really for this quarter, or do you see that now as a kind of increased level of commercial costs over maybe the next 12 months to reaccelerate revenue growth within that business? Thank you.

Thank you, James. This is Angel. With respect to the question that you had on Brazil, to over leverage that company to distribute dividend could potentially not be the most efficient financial measure for the Group, given the financial cost that you have for that in Brazil. And in any case, we, through the Group cash management mechanisms, have all the benefit of that cash which is sitting in Brazil.

Obviously, we evaluate continuously which are the ways to have the most efficient capital structure, taking into account not only Telefonica corporate balance sheet but also Telefonica Brazil balance sheet.

And taking your question on the UK commercial cost, I don't think you should consider it's going to be just for the last quarter. It's going to keep going through this year, as in the last quarter we have a retention cost and this quarter we are having as well a commercial effort.

So, we want to get traction on the market. And that's going to -- we want to be brilliant on come to market. And therefore, you should expect from us to keep investing on the commercial side.

Well, this is Cesar Alierta. I want to thank you very much all for your attendance and your questions in this conference call. In the name of all my colleagues and Executive Committee of Telefonica, I wish you all a very good weekend.

Thank you very much.

Telefonica's conference call is over. You may now disconnect your line. Thank you.